Tax Information
Overview for U.S. Holders
Assuming that the Trust is a Passive Foreign Investment
Corporation (PFIC), a U.S. Holder (as definied in the prospectus)
will be required to file an annual report with the IRS reporting
his, her or its investment in the Trust. Please see the IRS's 'Form
8621, Return by a Shareholder of a Passive Foreign Investment
Company or Qualified Electing Fund'.
Special U.S. federal income tax rules apply to a U.S. Holder
that holds stock in a foreign corporation classified as a PFIC for
U.S. federal income tax purposes. In general, the Trust will be
treated as a PFIC with respect to a U.S. Holder if, for any taxable
year in which such U.S. Holder held the units, either:
- at least 75% of the Trust's gross income for such taxable year
consists of passive income; or
- at least 50% of the average value of the assets held by the
Trust during such taxable year produce, or are held for the
production of, passive income.
For purposes of these tests, ''passive income'' includes
dividends, interest, and gains from the sale or exchange of
investment property (including commodities). The income that the
Trust derives from its sales of physical bullion is expected to be
treated as passive income for this purpose. Since substantially all
of the Trust's assets will consist of physical bullion and the
Trust expects to derive substantially all of its income from the
sales of physical bullion, it is expected the Trust will be treated
as a PFIC for each of its taxable years.
Assuming the Trust is a PFIC, a U.S. Holder will be subject to
different taxation rules depending on whether the U.S. Holder:
(1) makes an election to treat the Trust as a QEF, which is
referred to as a QEF election,
(2) makes a
mark-to-market election with respect to the units, or
(3)
makes no election and therefore is subject to the Default PFIC
Regime (as defined in the Prospectus).
As discussed in detail in the Prospectus, making a QEF election
or a mark-to-market election generally will mitigate the otherwise
adverse U.S. federal income tax consequences under the Default PFIC
Regime. However, the mark-to-market election may not be as
favorable as the QEF election because a U.S. Holder generally will
recognize income each year attributable to any appreciation in the
U.S. Holder's units without a corresponding distribution of cash or
other property.
Within 45 days from the end of each taxable year of the Trust,
the Trust Manager will provide or cause to be provided to
unitholders all information necessary to enable unitholders or
beneficial owners of units, as applicable, to elect to treat the
Trust as a QEF, including a PFIC form on the Trust's
website.
For more details, please see 'Material Tax Considerations' in
the Prospectus, which can be downloaded here.
FAQs for U.S. taxable holders of units of Sprott
Physical Silver Trust
The following discussion does not purport to deal with the tax
consequences of owning units to all categories of investors, some
of which, such as dealers in securities, regulated investment
companies, tax-exempt organizations, investors whose functional
currency is not the U.S. dollar and investors that own, actually or
under applicable constructive ownership rules, 10% or more of the
units, may be subject to special rules. This discussion does not
address U.S. state or local tax, U.S. federal estate or gift tax or
foreign tax consequences of the ownership and disposition of units.
This discussion deals only with holders who purchase units in
connection with this offering and hold the units as a capital
asset. You are encouraged to consult your own tax advisors
concerning the overall tax consequences arising in your own
particular situation under U.S. federal, state, local or foreign
law of the ownership of units.
Pursuant to U.S. Internal Revenue Service regulations, we hereby
inform you that: (i) any tax advice contained herein is not
intended and was not written to be used, and cannot be used by any
taxpayer, for the purposes of avoiding penalties that may be
imposed on the taxpayer; (ii) any such advice was written to
support the promotion or marketing of the units in Sprott Physical
Silver Trust; and (iii) each taxpayer should seek advice based on
the taxpayer's particular circumstances from an independent tax
advisor.
1. What are the tax consequences of selling my
units on NYSE Arca or TSX?
Answer: That depends on which of the following three
alternatives apply:
- you have made a timely and valid Qualified Election Fund, or
QEF, election;
- you have made a mark-to-market election; or
- you have made no election and therefore are subject to the
Default PFIC Regime (as defined below).
2. I have made a timely and valid QEF
election. What are the tax consequences of selling my units
on NYSE Arca or TSX?
Answer: Any gains realized on the sale of units by an
investor that is an individual, trust or estate, including such
investors that own units through partnerships and other
pass-through entities for U.S. federal income tax purposes, may be
taxable as long-term capital gains at a maximum rate of 20%
compared to a long-term capital gains tax rate of 28% applicable to
the disposition of physical silver bullion and other "collectibles"
held for more than one year, provided that such U.S. investor has
held the units for more than one year at the time of the sale and
such U.S. investor has made a timely and valid QEF election with
respect to the units.
3. How do I make a timely QEF
election?
Answer: A U.S. Holder would make a QEF election with
respect to any year that the Trust is a PFIC by filing IRS Form
8621 with his, her or its U.S. federal income tax return.
4. I have made a mark-to-market election.
What are the tax consequences of selling my units on NYSE Arca or
TSX?
Answer: If the mark-to-market election is made, the U.S.
Holder generally would include as ordinary income in each taxable
year the excess, if any, of the fair market value of the units at
the end of the taxable year over such U.S Holder's adjusted tax
basis in the units. The U.S. Holder would also be permitted an
ordinary loss in respect of the excess, if any, of the U.S.
Holder's adjusted tax basis in the units over their fair market
value at the end of the taxable year, but only to the extent of the
net amount previously included in income as a result of the
mark-to-market election. Any income inclusion or loss under the
preceding rules should be treated as gain or loss from the sale of
units for purposes of determining the source of the income or loss.
Accordingly, any such gain or loss generally should be treated as
U.S.-source income or loss for U.S. foreign tax credit limitation
purposes. A U.S. Holder's tax basis in his, her or its units would
be adjusted to reflect any such income or loss amount.
5. I have made neither a timely and valid QEF
election nor a mark-to-market election. What are the tax
consequences of selling my units on NYSE Arca or TSX?
Answer: If you have made neither a QEF election nor a
mark-to-market election for a year, you generally will be subject
to special rules, to which we will refer as the Default PFIC
Regime, with respect to
- any excess distribution (i.e., the portion of any distributions
received by you on the units in a taxable year in excess of 125% of
the average annual distributions received by you in the three
preceding taxable years, or, if shorter, your holding period for
the units), and
- any gain realized on the sale, exchange, redemption or other
disposition of the units.
Under the Default PFIC Regime:
- the excess distribution or gain would be allocated ratably over
the Non-Electing Holder's aggregate holding period for the
units;
- the amount allocated to the current taxable year and any
taxable year before the Trust became a PFIC would be taxed as
ordinary income; and
- the amount allocated to each of the other taxable years would
be subject to tax at the highest rate of tax in effect for the
applicable class of taxpayer for that year, and an interest charge
for the deemed deferral benefit would be imposed with respect to
the resulting tax attributable to each such other taxable
year.
6. What are the tax consequences of redeeming my
units for Silver?
Answer: If you have made a valid and timely QEF election
and redeem your units, you will be required to currently include in
your income your pro rata share of the Trust's gain from the
disposition of physical silver bullion, which will be taxable to a
non-corporate holder that has made a QEF election at a maximum rate
of 28% under current law if the Trust has held the physical silver
bullion for more than one year. Your adjusted tax basis in the
units will be increased to reflect such gain that is included in
income. You may further recognize capital gain or loss
on the redemption in an amount equal to the excess of the fair
market value of the physical silver bullion or cash received upon
redemption over your adjusted tax basis in the units. Such gain or
loss will be treated as described in FAQ #2 above.
If you have made a mark-to-market election, gain realized on the
sale, exchange, redemption or other disposition of the units would
be treated as ordinary income, and any loss realized on the sale,
exchange, redemption or other disposition of the units would be
treated as ordinary loss to the extent that such loss does not
exceed the net mark-to-market gains previously included by you. Any
loss in excess of such previous inclusions would be treated as a
capital loss. Your ability to deduct capital losses is
subject to certain limitations. Any such gain or loss generally
should be treated as U.S.-source income or loss for U.S. foreign
tax credit limitation purposes.
If you are subject to the Default PFIC Regime, gain realized on
the sale, exchange or redemption or other disposition of the units
will be treated as explained in FAQ #5 above.
7. I understand that the Trust is a closed-end fund
and therefore is different from other ETFs in the market. Does this
have negative operational or tax consequences to
investors?
Answer: Since the Trust is a closed-end fund, it differs
in certain respects from ETFs, which are generally open-end
funds. One of these differences is that the Trust only
redeems units on a monthly basis, provided that notice of
redemption is provided the Trust by the 15th of the month. As a
result, it is expected that most holders will sell their units on
the market rather than redeem them with the Trust.
On a redemption of units by another holder, the Trust will be
required to sell a portion of its silver in order to satisfy the
redemption. Alternatively, the Trust may distribute a portion
of its silver in-kind to satisfy the redemption, which for tax
purposes is considered a sale of the silver by the Trust. The gain
realized by the Trust on such a sale will be allocated pro rata
amongst the Trust's unitholders (including the redeeming holder)
and will be taxable to a U.S. Holder who has made a valid QEF
election at a rate of 28% assuming the silver has been held by the
Trust for more than one year. Each unitholder's tax basis
will be increased by the pro rata amount. For example, if the
Trust has 40 million units outstanding, a unitholder redeems one
million units and this redemption leads to a gain of $1 million
realized by the Trust, each unitholder's pro rata share of the
taxable gain would be $0.025 per unit, and the tax basis for each
unit will be increased by that amount as well.
As noted above, it is expected that most holders will sell their
units in the market to realize the full benefits of the long-term
capital gains tax rate if they have held units for more than one
year and have made a valid QEF election.
8. What tax information will I receive from the
Trust?
Answer: The Trust intends to annually provide each U.S. Holder
with all necessary information in order to make and maintain a QEF
election. This information will be made available on the
Trust's website.
9. What about foreign taxes?
Answer: Distributions, if any, by the Trust may be subject to
Canadian withholding taxes. A U.S. Holder may elect to either treat
such taxes as a credit against U.S. federal income taxes, subject
to certain limitations, or deduct his, her or its share of such
taxes in computing such U.S. Holder's U.S. federal taxable income.
No deduction for foreign taxes may be claimed by an individual who
does not itemize deductions.
10. Where can I find additional information about
the tax treatment of an investment in the Trust?
Answer: You can find additional information in the Trust's
prospectus.
